Raise Rates Into Recessionary Data? Bad Idea. (But The Fed Probably Will Anyway)

Takeaway: For the record, we're not getting bullish (on growth) anytime soon.

Raise Rates Into Recessionary Data? Bad Idea. (But The Fed Probably Will Anyway) - ISM blast off

An already tough year for Wall Street's U.S. economic bulls just got tougher. The steady stream of poor (recessionary?) economic data continues to come in. 

Here's what you need to know right now.

Earlier this morning on The Macro Show, Hedgeye CEO Keith McCullough cited “the most important chart” to look at today highlighting the fits and starts in the 10-year Treasury this year.

Here’s the chart and an abridged transcript of McCullough’s insights:

Raise Rates Into Recessionary Data? Bad Idea. (But The Fed Probably Will Anyway) - ism 10yr

“… Coming out of the spring time, the Fed says ‘We’re seeing greenshoots. We’re going to raise rates.’ The green line goes all the way up to 2.5% and a bunch of hedge fund managers start talk about the 10 year going to 3%.

 

Then, on economic data slowing well through August and September, the 10-year proceeds to go back to 2%. But, in October, the data bounces and the 10-year goes up. The Fed says ‘O my god, we’ve got to raise rates.’

 

Ever since the data has slowed so the arrow goes back down again.

 

If we were to pull back this chart you would further in time you would see lower highs from a longer term perspective. So, again, the Fed is fighting economic gravity and October was a head-fake.”

 

What does this mean for investors today?

“What the Federal Reserve is trying to do now is get the red line to go back into green line. That has been very unnatural for the market.

 

So that’s basically what’s happened in the past two weeks. The 10s and 2s spread has compressed, which means the long end of curve is compressing relative to short end. Essentially, the Fed goes to raise rates and the short end goes up but the long end says I don’t like this, the economic data is bad.”

Check out the epic spread compression between 10yr and 2yr Treasurys which we’ve dubbed “The Ultimate Growth Slowing Indicator”:

Raise Rates Into Recessionary Data? Bad Idea. (But The Fed Probably Will Anyway) - 11.30.15 EL chart

Following today's horrible ISM manufacturing print, the gap between the 10yr and 2yr compressed some more. McCullough called this out on The Macro Show prior to the report’s release.

Raise Rates Into Recessionary Data? Bad Idea. (But The Fed Probably Will Anyway) - ism tweet

“Today’s ISM number was one of the few numbers, in October, that didn’t bounce. This ISM report is pretty important report because last month it came in at 50.1, one notch away from looking as contractionary as Dr. Copper looks or Emerging Markets, or anything in junk bonds.

 

All of that stuff still looks about as bad as it did in July. So here’s another opportunity for you to reset yourself and set up for the next 3 month move as opposed to the one month head-fake that we had in October.”

Here’s a brief update McCullough wrote after the ISM report. 

Raise Rates Into Recessionary Data? Bad Idea. (But The Fed Probably Will Anyway) - ISM

“See the ISM bomb of 48.6? But no worries – if you back out company’s selling prices alongside strong dollar/weak demand deflation, and don’t look at US Retail Sales and/or consumption growth slowing from Q1 cycle peak – all good.”

 

And then there's this data point doozy from America's top CEOs:

Raise Rates Into Recessionary Data? Bad Idea. (But The Fed Probably Will Anyway) - ism other

We've been alerting subscribers to U.S. and global #GrowthSlowing for a while now. You won't hear about any of this from Old Wall perma-bulls, or the Fed for that matter.

Fed head Janet Yellen seems hell-bent on raising rates into slowdown.

Raise Rates Into Recessionary Data? Bad Idea. (But The Fed Probably Will Anyway) - ism tweet breaking